Ireland’s Budget 2024 and its impact on the State’s political outlook

Budget 2024 Breakdown

The measures announced in Budget 2024 have largely focused on supporting families and individuals through the current cost of living crisis. The package includes measures such as an increase in the minimum wage, an increase in social welfare and pension payments, raising the entry threshold for the lower income tax band, changes to the Universal Social Charge, mortgage supports, energy supports and rent relief. This focus, along with other government spending, has increased the Irish Government’s projected spending increase next year to 6.1% versus the 5%[1] increase originally planned.

The Minister also announced that the Department of Finance is forecasting that tax revenue will reach €88.3[2] billion this year and, for the first time in a number of years, that there is a downward revision for 2023 compared to earlier expectations. That is largely because of lower-than-expected corporation tax receipts, which fell during the summer. As expected, Ireland’s corporate tax rate will increase from 12.5% to 15% in January 2024[3], but this new band will only be applicable to companies who generate in excess of €750 million in annual revenue. This is part of the OECD new International Tax Framework announced back in 2021. Minister McGrath said this was a “once-in-a-generation reform to our corporation tax system, and marks the culmination of a ten-year, global project to reform the taxation of multi-national enterprises” [4].

Major New Investment Funds

The Irish Government also announced two new funds in Budget 2024[5] – The Future Ireland Fund and The Infrastructure, Climate and Nature Fund. The Future Ireland Fund is viewed as an ambitious plan to create a €100 billion sovereign wealth fund by the middle of the next decade. As the name suggests, it will help protect living standards and public services by providing funding to meet the costs of running the State in the years to come, in particular ease future expenditure pressures including demographic pressures, climate and digital transitions and housing. This fund will be financed by
€4 billion of seed funding from Ireland’s Rainy-Day Fund and a commitment to invest 0.8% of GDP annually. Meanwhile, the Infrastructure, Climate and Nature Fund is a €14 billion fund that will be put aside by 2030 to allow for sustained levels of investment in infrastructure in the event of economic downturns and to support climate and nature related projects[6].

Irish Economic Outlook

In terms of Ireland’s economic outlook, Minister McGrath did strike a cautionary tone at the outset of his Budget 2024 speech in the Dáil (Irish Parliament). Against the backdrop of global uncertainty, Minister McGrath noted that the Irish economy was in a “strong position today” but warned of external risks arising from higher interest rates, increasing prices, and the economic health of Ireland’s trading partners. Minister McGrath outlined that his department is projecting a slowdown in Irish economic growth this year, with Real GDP expected to grow by 2% this year and rise to 4.5% in 2024 on the back of a projected increase in export activity[7]. The Irish economy is also currently at full employment (unemployment was recorded at 4.8% for October[8]); however, inflation rose to 6.3% in September according to the CSO[9], with energy costs and consumer price increases putting further financial pressure on the population.

Political Reaction to Budget 2024

Budget 2024 was delivered as Ireland enters into election season, starting with local and European elections in June 2024. It is therefore unsurprising that the reaction from opposition parties was overwhelmingly critical. Leading opposition party, Sinn Féin, took aim at the Irish Government’s inability to tackle ongoing health, housing, and poverty issues. Speaking in the Dáil in the aftermath of the budget announcement, Sinn Féin’s finance spokesperson, Pearse Doherty, strongly criticised the government’s housing measures – specifically the landlord tax relief – viewing the Government as supporting landlords rather than helping renters or delivering new homes. Another criticism was the lack of new health funding for additional hospital beds or for basic healthcare services – delivering a “standstill budget for health”[10].The Labour Party viewed the tax breaks in the budget as “performative” measures which would deliver very little permanent change. The Labour Party’s spokesperson on Finance, Public Expenditure & Reform, Ged Nash, decried Budget 2024 – particularly the tax breaks for landlords – labelling it a “lazy return” to a previous decade of landlord-friendly policymaking when Fianna Fáil was in government[11]. 

Repeating Past Mistakes?

Beyond the political reaction, a number of financial institutions and advisory groups opined on the budget. The Irish Central Bank Chief, Gabriel Makhlouf, criticised the Irish Government for breaking its own spending rules and warned it could drive up inflation and risk damaging investment in the country. While he welcomed the creation of two new funds in creating long-term economic resilience, he was less supportive of the one-off measures which deviated from spending rules. Makhlouf said he would have taken a “less expansionary” approach and warned the fiscal package risks undermining efforts to cool inflation[12]. The concerns around fuelling inflation were echoed by Ireland’s budgetary watchdog, the Irish Fiscal Advisory Council, who viewed some of the tax cuts as “particularly ill-advised” and stated that the Irish Government was running the risk of “repeating Ireland’s past mistakes”.[13]

The Economic and Social Research Institute, a leading economic and policymaking think tank, viewed the budget as “progressive”, citing the belief that the budget will benefit lower income groups more than higher income groups – increasing household disposable income on average by 2%. However, it did flag that, while the overall Budget package is “substantial”, it could add to “inflationary pressures”.[14]Goodbody, one of Ireland’s leading financial services firm, described Budget 2024 as a “mixed bag”. They outlined that, while the Irish Government was able to keep core expenditure growth relatively close to its target (despite the higher inflation environment and the surge in overall needs due to population growth), they viewed the repeat of a series of non-core expenditure measures as less justified – particularly in light of the Irish economy’s full employment, falling energy prices and (albeit high) falling inflation.[15]

What’s next?

Ireland entered Budget 2024 with unemployment at its lowest rate for 20 years, the economy operating at full capacity, and state finances that are surging with tax revenue projected to be at a record high. One could argue that Ireland’s European counterparts might be looking on enviously at its economic position, given the economic struggles in the euro area. However, in politics, economic strength and fiscal prudence do not often translate to public popularity, and the electorate remains focused on the acute issues in housing and healthcare, and the struggle to meet increasing day to day living costs. The Irish Government – comprised of Fine Gael and Fianna Fail (historically the two largest political parties in Ireland), with the support of the smaller Green Party – has been struggling in opinion polls since its formation in 2020, with each of the main parties trailing Sinn Féin considerably in every poll published. A recent opinion poll[16] by the Sunday Independent and Ireland Thinks, revealed that Sinn Féin is likely to double its seat count in the next Dáil (currently 36 seats), with Fianna Fáil and Fine Gael projected to make single digit increases to their current seats (37 and 35 respectively). The poll also projected that the Green Party would lose all but one of their seats, a prediction that is in line with the historical precedent of smaller Irish political parties suffering losses at general elections following their tenure in government.

Against this challenging political landscape, the Irish Government had to deliver a budget that had one eye on the next election but was also fiscally sound. While some have criticised the increase in government spending, a 6.1% increase versus an original plan of 5%, could hardly be called excessive; however, the one-off measures are unlikely to dampen inflation against the current market backdrop. Time will tell if the government receives additional goodwill from the one-off measures on social welfare and pension supports, which are scheduled for staggered introduction well into the New Year and are presumably designed to improve public support for the government as the June 2024 elections approach.

The Next General Election – Housing and Health

Looking ahead, the next Irish general election has to be held no later than March 2025. It is not a certainty that the current government will complete its full term. It is likely that the Government will try to be in situ until after the next budget, in October 2024, using it to position each party favourably in the eyes of the electorate. The outcomes of the Local and European Elections in June will give insight into the Irish electoral mood music and could also influence the Irish Government’s decision on whether it calls an early election or opts to go the full term. For a snap general election to be called before October of next year, it would likely require a scandal or a significant deterioration in the relationship between the government parties.

Housing and health will be the dominant policy issues in the upcoming election campaigns. They have been the primary focus of opposition spokespeople, criticising the Irish Government’s failure to tackle the housing crisis and deliver any meaningful reform and improvement across the health sector. This is reflected in both opposition parties’ commentaries following the publication of Budget 2024 and the subsequent coverage, which focused on the Minister for Health, Stephen Donnelly’s failure to secure an additional €2 billion in funding for the health service in 2024, instead only receiving €800 million[17]. This is despite the health service forecasting a deficit of €1.5 billion for 2023, and a further deficit of €1.3 billion for 2024[18]. Many see this as a tactic deployed by the Department of Public Expenditure, in an attempt to bring more fiscal responsibility to a sector that has historically operated with significant deficits and is very heavy in its capital expenditure. However, whether this decision will create a schism in government as the Departments are run by representatives from different parties (Fianna Fáil in health and Fine Gael in expenditure) remains to be seen.

Potential Makeup of Next Irish Government – Sinn Féin and who?

While there is still some road to travel before we get to a general election, there is a clear trend from opinion polls pointing to Sinn Féin being the largest party in the next Dáil, and likely being the largest party in the next Irish Government. If that is the case, it will be the first time in the history of the Irish State that Sinn Féin would be in government. However, as is usually the case in Ireland, the party is unlikely to win an outright majority, based on the current poll numbers, and will therefore have to form a government with the support of other parties. The Sunday Independent and Ireland Thinks opinion poll projects that the smaller, left-wing parties will likely lose seats in the next general election – being negatively impacted by the recent redrawing[19] of constituencies by the Electoral Commission. This makes the formation of Ireland’s first left-wing coalition government unlikely as the respective parties simply won’t have the numbers.

That leaves either Fianna Fáil or Fine Gael as potential coalition maybes, neither of which would likely be too keen to enter government with Sinn Féin. Of the two, Fianna Fáil seems the most viable option, as Fine Gael has repeatedly ruled out the possibility of entering a coalition with Sinn Féin. Having been in government since 2011, Fine Gael may also want to be in opposition for a period. The understanding is that many senior Fine Gael party figures believe that they need a stint in opposition to rehabilitate their image with the electorate, allowing other parties experience of the trials and tribulations of governing. It would also present an opportunity to engage more at a grassroots level to attract new talent into the party. Fianna Fáil and Fine Gael have already had a number of senior TDs announce that they will not be running at the next general election, presenting an additional headache for each party to overcome.  

Beyond a government featuring Sinn Féin, a potential repeat of the current coalition of Fine Gael, Fianna Fáil and The Green Party is a remote option. However, this will largely depend on Fine Gael’s appetite for another stint in government ; and how The Green Party preforms, with projections indicating that they could lose the vast majority of their current 12 Dáil seats.

All eyes will turn to the European and county council elections in June 2024 which will be a bellwether for how the electorate is leaning – that is unless a snap election is called before then!

References

[1] https://www.gov.ie/en/publication/fda50-budget-2024-budget-publications/

[1] https://www.gov.ie/en/speech/c635a-statement-by-minister-mcgrath-on-budget-2024/

[2] https://www.gov.ie/en/speech/c635a-statement-by-minister-mcgrath-on-budget-2024/

[3] https://www.gov.ie/en/speech/c635a-statement-by-minister-mcgrath-on-budget-2024/

[4] https://www.gov.ie/en/speech/c635a-statement-by-minister-mcgrath-on-budget-2024/

[5] https://www.gov.ie/en/speech/c635a-statement-by-minister-mcgrath-on-budget-2024/

[6] https://www.gov.ie/en/speech/c635a-statement-by-minister-mcgrath-on-budget-2024/

[7] https://assets.gov.ie/273320/7da13749-b1d2-4f12-a6cd-6e705b0b11d3.pdf

[8] https://www.cso.ie/en/releasesandpublications/ep/p-mue/monthlyunemploymentoctober2023/

[9] https://www.cso.ie/en/releasesandpublications/ep/p-cpi/consumerpriceindexseptember2023/

[10] https://www.oireachtas.ie/en/debates/debate/dail/2023-10-10/4/

[11] https://www.oireachtas.ie/en/debates/debate/dail/2023-10-10/4/

[12] https://www.irishtimes.com/business/economy/2023/06/23/giveaway-budget-package-could-prolong-inflation-makhlouf-warns-government/

[13] https://www.rte.ie/news/business/2023/0906/1403561-ifac-govt-plans-to-increase-spending-ill-advised/

[14] https://www.esri.ie/news/budget-2024-tax-and-welfare-measures-likely-to-increase-real-income-next-year

[15] https://www.goodbody.ie/docs/default-source/fixed-income/budget-2024—something-for-everyone—goodbody.pdf?sfvrsn=6faeb76c_1#:~:text=Non%2Dcore%20and%20temporary%20spending,over%20the%20next%20six%20months.

[16] https://www.independent.ie/irish-news/sinn-fein-on-course-to-win-67-dail-seats-in-next-general-election-poll-predicts/a1662794585.html

[17] https://www.irishtimes.com/health/2023/10/12/stephen-donnelly-admits-to-shortfall-in-health-budget-for-next-year/

[18] https://www.irishtimes.com/health/2023/10/12/stephen-donnelly-admits-to-shortfall-in-health-budget-for-next-year/

[19] https://www.electoralcommission.ie/constituency-reviews/